WHAT IS THE GRADUATION PERIOD IN A LOAN: ADVANTAGES AND RISKS

Do you know what the grace period is on a loan ? Do you know that if you have contracted a loan and have previously agreed to it, there is a period in which you can request to pay less monthly fee , or even reduce it completely?

 

Well, that, basically and in simple terms, is what the lack of a loan means. It is a concept that is sometimes not well known and that a priori seems to offer advantages ; However, it also has its risks : that is why in the next few lines we are going to try to clearly explain what a deficiency is, and what its pros and cons. Surely you are interested in knowing.

 

The grace period on loans

 

We can say that a grace period is a variable period of time –one month, one year, etc.- in which by agreement of both parties one of them is exempt from fulfilling one or more of the obligations contracted during the contract. It is a term that is applied in many areas, not only financial ( loans, mortgages …) but also for example in insurance.

 

However, in insurance, a grace period defines the one in which the beneficiary is not entitled to certain coverage (to prevent, for example, that a person who is already ill takes out insurance that covers that illness), so we could say that it is something that it hurts the customer.

 

On the other hand, in the case of loans and mortgages, a priori the grace period seems to be in favor of the client , since it allows them to be exempted for a time from paying part or all of the monthly fee . It is what is popularly known as the “ grace period ”, and both its inclusion and the period in which we can use it are defined at the time of signing the loan contract.

 

In fact, it is a formula commonly used to make a loan more attractive , or for potential clients who might otherwise hesitate to apply for one because their financial situation is not the best to start hiring it. However, although at first glance it seems an advantage, as we will see later at the end, “the bank always wins”: that is, it is the bank that ultimately benefits.

 

How a deficiency works

 

The lack in a loan is something that is usually available when they exceed an amount, for example in mortgages , although not necessarily only in these. It can also occur in other contracts , such as those for the rental of real estate (housing, commercial premises, etc.).

 

It is more frequent that the contract agrees that a grace period can be requested during the beginning of the loan – when the client may be more economically drowned – than at the end; As for the term, it can range from a few months to even one or two years, during which the debtor may pay a smaller monthly fee … or even none, as we will see. Of course, in that time, you will not be paying off the loan.

 

It is important to emphasize that once the grace period is over, not only will we have to pay the installment of our loan again, but it will also be higher due to the accumulated interest. Therefore, requesting a grace period can give us a temporary respite, but in the end it always makes us have to pay more for the loan.

 

Types of deficiency

 

Basically we can define two types of grace period , defined because in one we will pay a smaller installment for a time (amortization deficiency), while in the other mode (total deficiency) we will not pay anything :

  • Amortization deficiency : defines a period in which we will only pay the interest on the loan but without amortizing the borrowed capital, so during that time our monthly payment will be lower (although we will not be amortizing any of the loan).
  • Total deficiency : in it we simply stop paying our quota completely: that is, we will not pay interest or capital amortization.

Should I request a “grace period” from the bank?

 

In view of the above, the truth is that requesting a grace period or a “grace period” from the bank where we have our loan can be very tempting, especially if we go through an economic downturn or our finances are overwhelmed by the payment of installments, since by requesting a lack of the loan we can have a “break” while better times arrive.

 

As we have already mentioned, grace periods are increasingly an important claim with which both financial institutions and other businesses try to attract new customers. It happens, for example, when we buy a late-model television or a new car because in the advertising the seller tells us “Buy, and don’t pay until …”.

 

However, we have already explained that this “respite” is not free, and that the one who wins is not the customer. That is to say, although apparently it seems that they are giving us a “gift”, in reality we are the ones who are paying it … In the end what we are doing is delaying the due date of the loan while we enjoy a good, which implies increasing the repayment period … and therefore interest increases as well .

 

That is why if we take into account, what apparently seemed an advantage or even a “grace” of our creditor, it is no longer so. So it is not only important to know what the grace period in a loan is, but above all to be clear about the inconveniences and risks that it entails, since we run the risk of prolonging over time and increasing a debt that perhaps, in the end, will be it can get out of hand.

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